The REIT Stuff: Investing with Zell

11/21/2003 12:00 am EST


Barry Vinocur

Editor, Realty Stock Review and REIT Wrap

At its 12th annual awards ceremony, Realty Stock Review introduced a REIT Hall of Fame, based on the results of ballots from more than 1,000 analysts and buy-siders. Six companies were inducted, along with one individualSam Zell. Here's a way to invest along with Zell in his real estate endeavors.

"Sam Zell operates three real estate investment trusts, Equity Office, Equity Residential, and our latest buy recommendation, Manufactured Home Communities (MHC NYSE)," says Barry Vinocur, editor of Realty Stock Review . "Even though we expect the company to cut its dividend, and the stock has been weak, we’re slapping a buy rating on MHC. In a nutshell, we believe the market has way overreacted to a likely cut in the payout next year. On the other hand, the firm will pay a special dividend early next year of between $8 and $10 a share, that’s higher than expected.

"While we understand that some folks find it unsettling that MHC is ‘slashing’ its payout, we believe the recapitalization has a number of underappreciated pluses that will become clearer. For instance, let’s say MHC pays a special dividend of $10 in January 2004. That’s equivalent to five years of the $1.98 dividend upfront. Plus, it looks like the $10 will be treated as a capital gain, not ordinary income. Said differently, REITs may not have been included in President Bush’s dividend tax relief bill, but if you own MHC you’ll get the same break as non-REITs for five years worth of payouts. Pretty neat, we think.

"Some folks are speculating that the recap is the first step in Sam Zell taking MHC private. Since it’s no secret that Mr. Zell believes the company is substantially undervalued, that’s not a far-fetched notion. Right? Wrong! Why? Several reasons. First, no one is more closely associated with the equitization of real estate than Zell. Though we long ago learned never to say never, we believe it’s unlikely he would take MHC private. And perhaps more importantly, why does he need to do it? In effect, the recap accomplishes most of what he might achieve via a going-private transaction.

"We also note that post-recap MHC, will be a more highly levered entity. Investors are also more likely–at least for a while–to view MHC not as a ‘good old REIT’, but rather as more geared to a good growth vehicle. Finally, the recap raises some issues that were it being done by someone other than Zell would give us pause. Though we never take our eye off the corporate governance ball, Sam Zell’s track record with respect to corporate governance is a truly exemplary one. Bottom line: Sam Zell never has given us any reason to doubt for even a nanosecond that his actions aren’t 1,000% in keeping long term shareholder interest."

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